A very important tool in business decision-making, market analysis is a careful, methodical process of estimating the potential demand for goods or services within a specific market. It can be done from the "bottom up" or from the "top down," depending on the type of information you have and the opportunity that you are pursuing. The most common method of market analysis is to calculate from the bottom up.
Consider all the different variables you will need to estimate the size your market from the bottom up. Narrow the market down by focusing on a time period and a specific region. For example, you are calculating the market for new automobiles in Illinois over a one-year time period.
Find the major parameters for the market, including the average price of a car, the number of consumers and the average automobile replacement period. These can be obtained by research from a third-party consulting firm, public research or through your own analysis.
Locate the average price for a car in the state. This may be obtained from public records. For our purposes we can assume it to be $25,000. The population in Illinois in 2010 was about 12 million. If 15 percent of the population are too old to drive and 30 percent are too young to drive or use public transportation, then the addressable population size is 50 percent of the total population, or 6 million.
Using the calculated value of 6 million drivers, solve for the estimated purchases of new cars in a year. Use research or analysis to determine that the average replacement period for a car is five years. Divide 6 million consumers by five to find 1.2 million cars purchased each year. Continue researching to find that the number of new cars purchased per year to be one-third of total cars purchased.
Using all the parameters listed above, plug in the values to calculate the market analysis:
- 1.2 million cars purchased per year x 1/3 (new cars) = 400,000 - 400,000 new cars purchased annually x $25,000 (average purchase price) = $10 billion annual market